Several types of fee agreements are common in legal practice in Germany. Still the most widespread one is the traditional ‘billable hour’ (model 1); a modification of this is the ‘blended rate’ (model 2). In the hourly rate model, the client pays an hourly amount based on the seniority of the relevant fee earner; in the blended rate model, he pays a uniform hourly rate which is independent of the seniority of the fee earner. In both cases, the number of billable hours is not in any way limited in advance. The the so-called cap model (model 3) sets a ceiling, typically based on a total estimate of the time spent, multiplied by an hourly fee; this is typically supplemented by a buffer for unforeseeable expenditure of time.
For a number of years, the ‘classic’ billable hour billing model has come under pressure: Companies frequently consider the hourly rates to be too high, recognize inefficiencies in practical application, and are therefore increasingly looking for alternative remuneration models which supplement the classic billable hour by flat rates for individual, previously defined legal services. This means: Fixed prices for individual services, without however completely abolishing the time fee.
Fixed prices are often still seen as a novelty in the German legal market – but companies are asking them more and more often from law firms. This article deals with some typical questions, as well as common misconceptions, about fixed price arrangements for legal services.
What are fixed price arrangements for legal services anyway?
Clients increasingly want to separately price individual ‘trades’ (i.e. defined work results) that are to be created as part of a mandate. This may be a seller due diligence, or a very standardized work stream; individual steps in a larger, interacting structure of individual elements are also conceivable, which are priced separately and given a fixed price. In addition, there is typically an additional, time-dependent fee for parts of the order that are not defined in advance.
Aren’t fixed price arrangements just a fad, the ‘next sow to be driven through the village’?
Not at all. Fixed price arrangements are the answer of those who buy the legal services to the ‘More-for-less-Challenge’ (Richard Susskind), i.e. the technology-driven challenge for law firms as well as in-house lawyers to increase output, increase quality or at least keep it constant, and all of this with falling costs. From the point of view of the contracting company, the task is therefore to ‘tailor’ the work packages arising in the mandate as precisely as possible so that the most extensive possible pricing is possible at fixed price conditions.
But aren’t fixed prices not at all suitable for many legal activities, since the practical application of the law is very difficult to plan?
Experience has shown that most mandates consist of numerous easily adaptable, reusable previous work products (templates), combined with occasionally time-consuming innovation in individual points, which can be priced based on reliable empirical experience. Flat-rate prices for individual work steps can therefore often be identified. There are two reasons for this: On the one hand, the project and resource management of law firms requires a detailed internal calculation of the likely effort before accepting a larger order. On the other hand, individual work packages can be put together for most mandates. The result: the more precisely and granularly planned, the easier the pricing. This is where the law firms benefit from their extensive experience – which is often enough advertised – to assess the workload and use of resources.
If the costs are broken down correctly, aren’t alternative billing models more expensive than the billable hour?
Usually not. Law firms paid on an hourly basis have an economic incentive to increase the number of hours spent and the number of team members. Model 1 can therefore be expensive. And even with model 2, there may be a tendency to let less qualified professionals do medium-heavy jobs.
Structured alternative models with limited fees and rewarding certain achieved goals provide law firms with incentives to achieve client goals quickly, to use cost-saving technologies and to make other efforts to improve efficiency. Alternative models are therefore suitable for reducing legal fees.
How should companies proceed?
Clients should proactively discuss the use of alternative compensation models with “their” law firms; which, in our experience, they do in the context of panel appointments. It is also advisable to carry out tenders for individual mandates. This is the only way for companies to generate competitive pressure to determine real market prices between competing law firms.